PLANTERS PRODUCTS, INC., vs. FERTIPHIL CORPORATION. [G.R. No. 166006. March 14, 2008.]

Facts: President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition by the Fertilizer Pesticide Authority (FPA) of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Philippines. The goal is to make and keep respondent PPI viable. After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demandFertiphil filed a complaint for collection and damages against FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law. FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country

Issue/Held: Whether the levy is in exercise of police power or taxation power- TAXATION

Ratio: We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. The purpose of a law is evident from its text or inferable from other secondary sources. Here, we agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose because it expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit from Clause 3 of the law

STATE LAND INVESTMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE.

[G.R. No. 171956. January 18, 2008.]

Facts: Petitioner filed with the Bureau of Internal Revenue (BIR) its annual income tax return for the calendar year ending December 31, 1997. Its taxable income was P27,723,328.00 with tax due in the amount of P9,703,165.54. Its total tax credits for the same year amounted to P23,632,959.05, inclusive of its prior year's excess tax credits of P9,289,084.00. Thus, after applying its total tax credits of P23,632,959.05 against its income tax liability of P9,703,165.54, the amount of P13,929,793.51 remained unutilized. Petitioner opted to apply this amount as tax credit to the succeeding taxable year 1998.

On April 15, 1999, petitioner again filed with the BIR its annual income tax return for the calendar year ending December 31, 1998, declaring a minimum corporate income tax due in the amount of P4,187,523.00. Petitioner charged the said amount against its 1997 excess credit of P13,929,793.51, leaving a balance of P9,742,270.51.On April 7, 2000, petitioner filed with the BIR a claim for refund of its unutilized tax credit for the year 1997 in the amount P9,742,270. CTA denied petitioner's claim for refund of its unutilized tax credit for 1997.

Issue/Held: W/N petitioner can claim a refund of its unutilized tax credit for 1997 - YES

Ratio: Under Section 69 (now Section 76) of the Tax Code then in force, it is clearly provided that a taxable corporation is entitled to a tax refund when the sum of the quarterly income taxes it paid during a taxable year exceeds its total income tax due also for that year. Consequently, the refundable amount that is shown on its final adjustment return may be credited, at its option, against its quarterly income tax liabilities for the next taxable year. Excess income taxes paid in a year that could not be applied to taxes due the following year may be refunded the next year. Thus, if the excess income taxes paid in a given taxable year have not been entirely used by a taxable corporation against its quarterly income tax liabilities for the next taxable year, the unused amount of the excess may still be refunded, provided that the claim for such a refund is made within two years after payment of the tax.

COMMISSIONER OF INTERNAL REVENUE, vs. FORTUNE TOBACCO CORPORATION [G.R. Nos. 167274-75. July 21, 2008.].

Facts: After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition. Section 145 of the Tax Code mandates a 12% increase effective on 1 January 2000 based on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99 went further and added that "the new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000". Fortune now assails the validity of said Revenue Regulation.

Issue/ Held: W/N Revenue Regulation No. 17-99 is valid- NO

Ratio: Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12% — a situation not supported by the plain wording of Section 145 of the Tax Code.

Tax refunds or tax credits are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person's unjust enrichment at the expense of another. The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in fact but also mistake in law. The Government is not exempt from the application of solutio indebiti. Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously collected. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich itself at the expense of taxpayers. And so, given its essence, a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case.

PHILEX MINING CORPORATION, vs. COMMISSIONER OF INTERNAL REVENUE. [G.R. No. 148187. April 16, 2008.]

Facts: Philex Mining Corporation (Philex Mining), entered into an agreement with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and operate the latter's mining claim. The parties' agreement was denominated as "Power of Attorney". The mine suffered continuing losses over the years which resulted to petitioner's withdrawal as manager of the mine and in the eventual cessation of mine operations. the parties executed an "Amendment to Compromise with Dation in Payment" where the parties determined that Baguio Gold's indebtedness to petitioner actually amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00. In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and allowances." However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax. The petition for review filed in the CTA was also denied

Issue/ Held: W/N the amounts in question can be considered as bad debts that can be deducted from gross income- NO.

Ratio: All told, the lower courts did not err in treating petitioner's advances as investments in a partnership known as the Sto. Niño mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same to the former under the "Power of Attorney". In sum cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. In this case failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

SMART COMMUNICATIONS, INC., vs. THE CITY OF DAVAO, represented herein by its Mayor HON. RODRIGO R. DUTERTE, and the SANGGUNIANG PANLUNGSOD OF DAVAO CITY. [G.R. No. 155491. September 16, 2008.]

Facts: Smart filed a special civil action for declaratory relief 3 under Rule 63 of the Rules of Court, for the ascertainment of its rights and obligations under the Tax Code of the City of Davao. Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 7294 subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160; (b) Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the "in lieu of all taxes" clause found in Section 9 of R.A. No. 7294; and (d) the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts. RTC denied the petition.

Issue/ Held: W/N Smart is exempt from franchise and local taxes- NO

Ratio: We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the "in lieu of all taxes" provision in the franchise of Smart would include exemption from local or national taxation. What is clear is that Smart shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal In this case, the doubt must be resolved in favor of the City of Davao. The "in lieu of all taxes" clause applies only to national internal revenue taxes and not to local taxes.

EMERLINDA S. TALENTO, in her capacity as the Provincial Treasurer of the Province of Bataan, vs. HON. REMIGIO M. ESCALADA, JR., Presiding Judge of the Regional Trial Court of Bataan, Branch 3, and PETRON CORPORATION [G.R. No. 180884. June 27, 2008.]

Facts: Petron received from the Provincial Assessor's Office of Bataan a notice of revised assessment over its machineries and pieces of equipment in Lamao, Limay, Bataan. Petron filed a petition with the LBAA. Petron received from petitioner a final notice of delinquent real property tax with a warning that the subject properties would be levied and auctioned should Petron fail to settle the revised assessment due.

Consequently, Petron sent a letter to petitioner stating that in view of the pendency of its appeal with the LBAA, any action by the Treasurer's Office on the subject properties would be premature. However, petitioner replied that only Petron's payment under protest shall bar the collection of the realty taxes due, pursuant to Sections 231 and 252 of the LGC. On even date, Petron filed with the Regional Trial Court of Bataan the instant case (docketed as Civil Case No. 8801) for prohibition with prayer for the issuance of a temporary restraining order (TRO) and preliminary injunction. The trial court issued the assailed Order granting Petron's petition for issuance of writ of preliminary injunction, subject to Petron's posting of a P444,967,503.52 bond in addition to its previously posted surety bond of P1,286,057,899.54, to complete the total amount equivalent to the revised assessment of P1,731,025,403.06. The trial court held that in scheduling the sale of the properties despite the pendency of Petron's appeal and posting of the surety bond with the LBAA, petitioner deprived Petron of the right to appeal.

Issue/Held: W/N the trial court properly issued the injunction order- YES

Ratio: We are not unaware of the doctrine that taxes are the lifeblood of the government, without which it cannot properly perform its functions; and that appeal shall not suspend the collection of realty taxes. However, there is an exception to the foregoing rule, i.e., where the taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the payment of taxes. In the instant case, we note that respondent contested the revised assessment on the following grounds: that the subject assessment pertained to properties that have been previously declared; that the assessment covered periods of more than 10 years which is not allowed under the LGC; that the fair market value or replacement cost used by petitioner included items which should be properly excluded; that prompt payment of discounts were not considered in determining the fair market value; and that the subject assessment should take effect a year after or on January 1, 2008. To our mind, the resolution of these issues would have a direct bearing on the assessment made by petitioner. Hence, it is necessary that the issues must first be passed upon before the properties of respondent is sold in public auction.

Commissioner vs. Algue

Facts: The Philippine Sugar Estate Development Company (PSEDC) appointed Algue Inc. as its agent, authorizing it to sell its land, factories, and oil manufacturing process. The Vegetable Oil Investment Corporation (VOICP) purchased PSEDC properties. For the sale, Algue received a commission of P125,000 and it was from this commission that it paid Guevara, et. al. organizers of the VOICP, P75,000in promotional fees. In 1965, Algue received an assessment from the Commissioner of Internal Revenue in the amount of P83,183.85 as delinquency income tax for years 1958 and 1959. Algue filed a protestor request for reconsideration which was not acted upon by the Bureau of Internal Revenue (BIR). The counsel for Algue had to accept the warrant of distrant and levy. Algue, however, filed a petition for review with the Court of Tax Appeals.

Issue: Whether the assessment was reasonable.

Held: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Every person who is able to pay must contribute his share in the running of the government. The Government, for his part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that is an arbitrary method of exaction by those in the seat of power. Tax collection, however, should be made in accordance with law as any arbitrariness will negate the very reason for government itself. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate that the law has not been observed. Herein, the claimed deduction (pursuant to Section 30[a] [1] of the Tax Code and Section 70 [1] of Revenue Regulation 2: as to compensation for personal services) had been legitimately by Algue Inc. It has further proven that the payment of fees was reasonable and necessary in light of the efforts exerted by the payees in inducing investors (in VOICP) to involve themselves in an experimental enterprise or a business requiring millions of pesos. The assessment was not reasonable.

NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN

GR. No. 149110, April 9, 2003

Facts: NAPOCOR, the petitioner, is a government-owed and controlled corporation created under Commonwealth Act 120. It is tasked to undertake the “development of hydroelectric generations of power and the production of electricity from nuclear, geothermal, and other sources, as well as, the transmission of electric power on a nationwide basis.”

For many years now, NAPOCOR sells electric power to the resident Cabanatuan City, posting a gross income of P107,814,187.96 in 1992. Pursuant to Sec. 37 of Ordinance No. 165-92, the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the former’s gross receipts for the preceding year.

Petitioner, whose capital stock was subscribed and wholly paid by the Philippine Government, refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contend that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with Sec. 13 of RA 6395, as amended. The respondent filed a collection suit in the RTC of Cabanatuan City, demanding that petitioner pay the assessed tax, plus surcharge equivalent to 25% of the amount of tax and 2% monthly interest. Respondent alleged that petitioner’s exemption from local taxes has been repealed by Sec. 193 of RA 7160 (Local Government Code). The trial court issued an order dismissing the case. On appeal, the Court of Appeals reversed the decision of the RTC and ordered the petitioner to pay the city government the tax assessment.

Issues:

(1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government and its charter characterized is as a ‘non-profit organization’?

(2) Is the NAPOCOR’s exemption from all forms of taxes repealed by the provisions of the Local Government Code (LGC)?

Held:

(1) NO. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name, and can exercise all the powers of a corporation under the Corporation Code. To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is no engage din business.

(2) YES. One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the National Government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fees, or charges on the aforementioned entities. The legislative purpose to withdraw tax privileges enjoyed under existing laws or charter is clearly manifested by the language used on Sec. 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used

Mactan Cebu (MCIAA) vs. Marcos

FACTS:

Mactan Cebu International Airport Authority (MCIAA) was created to “principally undertake to economical, efficient and effective control, management and supervision of the Mactan International Airport… and such other airports as may be established in the province of Cebu…” Section 14 of its charter exempts the Authority from payment of realty taxes but in 1994, the City Treasurer demanded payment for realty taxes on several parcels of land belonging to the other. MCIAA filed a petition in RTC contending that, by nature of its powers and functions, it has the same footing of an agency or instrumentality of the national government. The RTC dismissed the petition based on Section 193 & 234 of the local Government Code or R.A. 7160. Thus this petition.

ISSUE:

Whether or not the MCIAA is exempted from realty taxes?

RULING:

With the repealing clause of RA 7160 the tax exemption provided. “All general and special in the charter of the MCIAA has been expressly repeated. It state laws, acts, City Charters, decrees, executive orders, proclamations and administrative regulations, or part of parts thereof which are inconsistent with any of the provisions of the Code are hereby repeated or modified accordingly.” Therefore the SC affirmed the decision and order of the RTC and herein petitioner has to pay the assessed realty tax of its properties effective January 1, 1992 up to the present.

FELS ENERGY vs. BATANGAS

FACTS:

Power energy leased its power barge to NPC for a period of 5 years. In the agreement, NPC was made to shoulder any tax expenses related to the power barge then Polar assigned its rights to FELS. Batangas assessed the property and FELS referred the matter to NPC pursuant to the Agreement. NPC sought reconsideration to Provincial Assessor but was denied. LBAA affirmed provincial assessor while CBAA found the power barges exempt from real property tax, consequently reversed its own ruling. FELS & NPC separately filed a petition for review before CA.

ISSUE:

Whether or not local assessor has the jurisdiction to entertain any request for a review or readjustment.

RULING:

The appropriate forum where the aggrieved party may bring his appeal is the LBAA as provided by law. It follows that the 60-day period for making the appeal to LBAA runs without interruption.

If the taxpayer fails to appeal in due course, the right of the local government to collect the taxes due with respect to the taxpayer’s property becomes absolute upon the expiration of the period to appeal. Also, failure of taxpayer to question the assessment in the LBAA renders the assessment of the local assessor final, executory and demandable, thus precluding the taxpayer from questioning the correctness of the assessment, or from invoking any defense that would re open the question of its liability on the merits.

CIR vs. Fortune Tobacco Corporation, [G.R. Nos. 167274-75, July 21, 2008]

Facts: Respondent FTC is a domestic corporation that manufactures cigarettes packed by machine under several brands. Prior to January 1, 1997, Section 142 of the 1977 Tax Code subjected said cigarette brands to ad valorem tax. Annex D of R.A. No. 4280 prescribed the cigarette brands’ tax classification rates based on their net retail price. On January 1, 1997, R.A. No. 8240 took effect. Sec. 145 thereof now subjects the cigarette brands to specific tax and also provides that: (1) the excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996; (2) the rates of excise tax on cigarettes enumerated therein shall be increased by 12% on January 1, 2000; and (3) the classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex D shall remain in force until revised by Congress.

The Secretary of Finance issued RR No. 17-99 to implement the provision for the 12% excise tax increase. RR No. 17-99 added the qualification that “the new specific tax rate xxx shall not be lower than the excise tax that is actually being paid prior to January 1, 2000.” In effect, it provided that the 12% tax increase must be based on the excise tax actually being paid prior to January 1, 2000 and not on their actual net retail price.

FTC filed 2 separate claims for refund or tax credit of its purportedly overpaid excise taxes for the month of January 2000 and for the period January 1-December 31, 2002. It assailed the validity of RR No. 17-99 in that it enlarges Section 145 by providing the aforesaid qualification. In this petition, petitioner CIR alleges that the literal interpretation given by the CTA and the CA of Section 145 would lead to a lower tax imposable on 1 January 2000 than that imposable during the transition period, which is contrary to the legislative intent to raise revenue.

Issue: Should the 12% tax increase be based on the net retail price of the cigarettes in the market as outlined in Section 145 of the 1997Tax Code?

Held: YES. Section 145 is clear and unequivocal. It states that during the transition period, i.e., within the next 3 years from the effectivity of the 1997 Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000.

Clearly, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to be lower than that collected prior to this date.

The qualification added by RR No. 17-99 imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the 3-year transition period and the specific tax under Section 145, as increased by 12%—a situation not supported by the plain wording of Section 145 of the 1997 Tax Code. Administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out.

Revenue generation is not the sole purpose of the passage of the 1997 Tax Code. The shift from the ad valorem system to the specific tax system in the Code is likewise meant to promote fair competition among the players in the industries concerned and to ensure an equitable distribution of the tax burden.

CIR v. PLDT

Facts: For equipment, machineries and spare parts it imported from October 1, 1992 to May 31,1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a)compensating tax of P126,713,037.00; (b) advance sales tax of P12,460,219.00 and (c)other internal revenue taxes of P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).(Note: PLDT did not necessarily pay VAT directly to the BIR.)After a ruling was handed down by the BIR to the effect that the PLDT is exempt from paying all taxes on its franchise and earnings including the VAT because of the 3%franchise tax imposed on it by Section 12 of RA 7082, the PLDT claimed from the BIR a tax credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying. When its claim was not acted upon by the BIR, PLDT went to the CTA. The CTA ruled for PLDT, but made deductions (refundable amounts which period to claim had already prescribed) from the total tax refund prayed for by PLDT. The CIR appealed to the CA. The CA affirmed the CTA’s decision. The CIR appealed to the SC, saying that the CA erred in ruling that because of the 3% franchise tax the PLDT is exempt from paying all taxes, including indirect taxes.

Issue: WON the 3% franchise tax exempts the PLDT from paying all other taxes, including indirect taxes.

Held: No.

1.Direct taxes are those exacted from the very person who, it is intended or desired, should pay them. They are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in.

2.Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. In other words, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods beforereaching the consumer who ultimately pays for it. When the seller passes on thetax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.

3.The NIRC classifies VAT as “an indirect tax … the amount of [which] may be shifted or passed on to the buyer, transferee or lessee of the goods”.

The 10%VAT on importation of goods is in the nature of an excise tax levied on the privilege of importing articles. It is imposed on all taxpayers who import goods. It is not a tax on the franchise of a business enterprise or on its earnings, as stated in Section 2 of RA 7082.

4.Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax or lay the “economic burden of the tax” on the purchaser by subsequently adding the tax to the selling price of the imported article or finished product.

5.Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not.

6.The liability for the payment of the indirect taxes lies with the seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke one’s exemption privilege to avoid the passing on or the shifting of the VAT to him by themanufacturers/suppliers of the goods he purchased. Hence, it is important todetermine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable. Since RA 7082 did not specifically include indirect taxes in the exemption granted to PLDT, the latter cannot claim exemption from VAT, advance sales tax and compensating tax.

7.The clause “in lieu of all taxes” in Section 12 of RA 7082 is immediately followed by the qualifying clause “on this franchise or earnings thereof”, suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to

PLDT’s franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT’s franchise or earnings, are not included in the exemption provision.

8.PLDT’s allegation that the Bureau of Customs assessed the company for advance sales tax and compensating tax for importations entered between October 1, 1992 and May 31, 1994 when the value-added tax system already replaced, if not totally eliminated, advance sales and compensating taxes, is with merit. Pursuant to Executive Order No. 273, a multi-stage value-added tax was put into place to replace the tax on original and subsequent sales tax. Therefore, compensating tax and advance sales tax were no longer collectible internal revenue taxes under the NIRC when the Bureau of Customs made the assessments in question and collected the corresponding tax. Stated a bit differently, PLDT was no longer under legal obligation to pay compensating tax and advance sales tax on its importation from 1992 to 1994. A refund of the amounts paid as such taxes is thus proper.

9.P87,257,031.00 of compensating tax + P7,416,391.00 advanced sales tax =P94,673,422.00 total refund.

JESUS SACRED HEART COLLEGE V. COLLECTOR OF INTERNAL REVENUE- TAX EXEMPTION

Actual realization of profits is immaterial; what is important is the presence of the purpose to make a profit over and above the cost of instruction. At any rate, the main evidence of the purpose of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation and the by-laws outline the administrative organization of the corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.

Facts: This is an appeal taken by defendant, Collector of Internal Revenue, from a decision of the Court of First Instance of Manila sentencing him to refund to plaintiff, Jesus Sacred Heart College, the sum of P2,241.86, assessed by the former, and paid by the latter, by way of income tax for the years 1947, 1948 and 1949. The parties have stipulated:

1. That the Jesus Sacred Heart College is an educational organization authorized to operate and existing in Lucena, Quezon, and offering to the public elementary, secondary and collegiate courses;

2. That according to its income tax returns, plaintiff realized net incomes from tuition and other fees in carrying on its educational activity in the amounts of P5,659.07; P3,743.82; and P3,572.74 for the years 1947, 1948 and 1949 respectively;

3. That the amount of P2,241.86 (was paid by the plaintiff to the defendant on August 13, 1951 as its income tax.

4. That a claim for refund of said amount of P2,241.86 was duly filed on August 16, 1951 by the plaintiff with the defendant but the claim was denied on August 24, 1951;

5. The assessment notices for the deficiency income tax for the years 1947, 1948 and 1949 were forwarded by the defendant to the plaintiff on or about December 15, 1950, the letter enclosing the said notices was dated December 12, 1950, and the notices were dated December 6, 1950.

Plaintiff appellee maintains, and the lower court held, that it is exempt from taxation under the first part of said paragraph (e), whereas defendant-appellant asserts that the income in question was derived form an "activity conducted for profit," and that, accordingly, it is taxable under the proviso of the same paragraph.

Issue: Whether or not the net income from the tuition and other fees collected and received by the plaintiff is subject to income tax under the provisions of section 24 of the National Internal Revenue Code, notwithstanding the provisions of section 27(e).

Held: No.. Section 27(e) of the National Internal Revenue Code, as amended by Republic Act No. 82 (section 5), exempts from taxation the "net income" of corporations "organized and operated exclusively for ... educational purposes ... no part of the net income of which inures to the benefit of any private stockholder or individual," and it is conceded that plaintiff corporation belongs to this class. To hold that an educational Institution is subject to income tax whenever it is so administered as to reasonably assure that it will not incur in deficit, is to nullify and defeat the aforementioned exemption. Indeed, the effect, in general, of the interpretation advocate by appellant would be to deny the exemption whenever there is net income, contrary to the tenor of said section 27(e) which positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of said net income.

Needless to say, every responsible organization must be so run to, at least insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus.

At any rate, the main evidence of the purpose of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation (Sec. 6, Act No. 1459), and the by-laws outline the administrative organization of the corporation (Sec. 20 and 21 of Act No. 1459, as amended), which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.